Pain at the pump?

Takeaways

  • As gasoline prices have been rising, so too have concerns that this will put a crimp in the summer fun.
  • The trepidation centers not only on summer driving and gasoline demand, but also on the potentially negative impact of higher gasoline prices on the US economy as higher fuel outlays constrain disposable income.
  • However, the US economy is less exposed to increases in oil prices today than it was, say, 10 years ago as domestic oil production has roughly doubled in volume.

Ladies and gentlemen, start your engines!

Gasoline demand in the US is typically strongest during the summer months. But as gasoline prices have been rising, so too have concerns that this will put a crimp in the summer fun. The trepidation centers not only on summer driving and gasoline demand, but also on the potentially negative impact of higher gasoline prices on the US economy as higher fuel outlays constrain disposable income. 

Gas prices on the rise this summer?

The summer season has finally arrived, but many motorists may be concerned by demand trends for oil and gas this time of year. Gain insight on these trends and what’s behind the rise in gas prices. Listen to an interview with Nicki Decker, Energy Equity Sector Strategist Americas, UBS.

Is it really that bad? As Nicki Decker, Energy Equity Sector Strategist Americas, UBS, and Brian Rose, Senior Economist Americas, UBS, discuss in their May 22 issue of the Intellectual Capital Blog (PDF, 257 KB), the national average retail price for gasoline has risen by $0.33 per gallon (+12%) in the past 12 weeks, to $3.00 per gallon. Today's average pump price is $0.49 per gallon above a year ago.

Rising crude oil prices have taken much of the blame for higher gasoline prices, but we would note that gasoline prices typically rise in the springtime due to the seasonal switch to summer-grade gasoline.

Summer-grade gasoline (mandated through environmental regulation) is more costly to produce, and this cost is effectively passed on to the consumer. In seven of the past 10 years, US gasoline prices have peaked in April, May or June—most often in June.

No matter the reason, we all feel the impact of higher gasoline prices to some extent. But in actuality, today's price is just below the average US gasoline price seen thus far this decade. And while prices have risen quickly, we believe they are still well below levels that would cause US consumers to buckle financially. Based on history, the breaking point for consumers has been around the $4.00 per gallon level.

Assuming today's price holds for the remainder of this year, we estimate US consumers might have to spend over $54 billion more on gasoline this year than last year. That is, assuming demand remains flat with a year ago. For perspective, this would represent about 1.1% of 2017 US retail sales; and about 0.3% of US GDP. However, we expect the magnitude of any negative impact to be less.

Barring an unanticipated supply shock, further oil price increases should be temporary. Our price outlook for West Texas Intermediate is $70 per barrel in 12 months (from $72 per barrel now). Seasonal effects, which are driving gasoline prices higher, now may also reverse in the coming weeks. We would also note the following potential offsetting factors:

The US economy is less exposed to increases in oil prices than say, ten years ago, as US oil production has about doubled in volume.

  • Gasoline demand has risen sharply over the past three years, in part due to more affordable gasoline. Part of the consumer response has been seen in the new light truck market, where demand has been very strong. In a rising price scenario, this trend typically reverses, with consumers favoring more fuel-efficient vehicles. In 2014, prior to the sharp decline in oil and gasoline prices, US gasoline demand was 398,000 barrels per day (4%) below 2017. Reducing demand by this amount would save consumers about $18 billion, assuming current prices.
  • The US economy is less exposed to increases in oil prices than say, ten years ago, as US oil production has about doubled in volume. The result is increased US employment and wages in the energy industry when oil prices are higher. While this effect is more obvious on a regional level, the impact should at least partially offset the negatives from rising gasoline prices.

Learn more: Read the May 22 Intellectual Capital Blog, "Higher gasoline prices raising concern as summer driving season approaches (PDF, 257 KB)" and listen to the UBS On-Air podcast, "Gasoline prices on the rise for the summer?"

Are you prepared for the energy landscape of tomorrow? Together we can find an answer. Connect with your UBS Financial Advisor or find one

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